Strategic management

In the field of management, 'strategic management involves the formulation and implementation of the major goals and initiatives taken by an organization's top managers on behalf of owners, based on consideration of resources and an assessment of the internal and external environments in which the organization operates.[1][need quotation to verify][2][3]

Strategic management provides overall direction to an enterprise and involves specifying the organization's objectives, developing policies and plans to achieve those objectives, and then allocating resources to implement the plans.[4] Academics and practicing managers have developed numerous models and frameworks to assist in strategic decision-making in the context of complex environments and competitive dynamics.[5] Strategic management is not static in nature; the models often[quantify] include a feedback loop to monitor execution and to inform the next round of planning.[6][7][8]

Michael Porter identifies three principles underlying strategy:[9]

  • creating a "unique and valuable [market] position"
  • making trade-offs by choosing "what not to do"
  • creating "fit" by aligning company activities with one another to support the chosen strategy

Corporate strategy involves answering a key question from a portfolio perspective: "What business should we be in?" Business strategy involves answering the question: "How shall we compete in this business?"[10]

Management theory and practice often make a distinction between strategic management and operational management, with operational management concerned primarily with improving efficiency and controlling costs within the boundaries set by the organization's strategy.[citation needed]

Application

Strategic management processes and activities

Strategy is defined as "the determination of the basic long-term goals of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals."[11] Strategies are established to set direction, focus effort, define or clarify the organization, and provide consistency or guidance in response to the environment.[12]

Strategic management involves the related concepts of strategic planning and strategic thinking. Strategic planning is analytical in nature and refers to formalized procedures to produce the data and analyses used as inputs for strategic thinking, which synthesizes the data resulting in the strategy. Strategic planning may also refer to control mechanisms used to implement the strategy once it is determined. In other words, strategic planning happens around the strategic thinking or strategy making activity.[13]

Strategic management is often described as involving two major processes: formulation and implementation of strategy. While described sequentially below, in practice the two processes are iterative and each provides input for the other.[13]

Formulation

Formulation of strategy involves analyzing the environment in which the organization operates, then making a series of strategic decisions about how the organization will compete. Formulation ends with a series of goals or objectives and measures for the organization to pursue. Environmental analysis includes the:

  • Remote external environment, including the political, economic, social, technological, legal and environmental landscape (PESTLE);
  • Industry environment, such as the competitive behavior of rival organizations, the bargaining power of buyers/customers and suppliers, threats from new entrants to the industry, and the ability of buyers to substitute products (Porter's 5 forces); and
  • Internal environment, regarding the strengths and weaknesses of the organization's resources (i.e., its people, processes and IT systems).[13]

Strategic decisions are based on insight from the environmental assessment and are responses to strategic questions about how the organization will compete, such as:

  • What is the organization's business?
  • Who is the target customer for the organization's products and services?
  • Where are the customers and how do they buy? What is considered "value" to the customer?
  • Which businesses, products and services should be included or excluded from the portfolio of offerings?
  • What is the geographic scope of the business?
  • What differentiates the company from its competitors in the eyes of customers and other stakeholders?
  • Which skills and capabilities should be developed within the firm?
  • What are the important opportunities and risks for the organization?
  • How can the firm grow, through both its base business and new business?
  • How can the firm generate more value for investors?[13][14]

The answers to these and many other strategic questions result in the organization's strategy and a series of specific short-term and long-term goals or objectives and related measures.[13]

Implementation

The second major process of strategic management is implementation, which involves decisions regarding how the organization's resources (i.e., people, process and IT systems) will be aligned and mobilized towards the objectives. Implementation results in how the organization's resources are structured (such as by product or service or geography), leadership arrangements, communication, incentives, and monitoring mechanisms to track progress towards objectives, among others.[13]

Running the day-to-day operations of the business is often referred to as "operations management" or specific terms for key departments or functions, such as "logistics management" or "marketing management," which take over once strategic management decisions are implemented.[13]

Definitions

Strategy has been practiced whenever an advantage was gained by planning the sequence and timing of the deployment of resources while simultaneously taking into account the probable capabilities and behavior of competition.

Bruce Henderson[15]

In 1988, Henry Mintzberg described the many different definitions and perspectives on strategy reflected in both academic research and in practice.[16][17] He examined the strategic process and concluded it was much more fluid and unpredictable than people had thought. Because of this, he could not point to one process that could be called strategic planning. Instead Mintzberg concludes that there are five types of strategies:

  • Strategy as plan – a directed course of action to achieve an intended set of goals; similar to the strategic planning concept;
  • Strategy as pattern – a consistent pattern of past behavior, with a strategy realized over time rather than planned or intended. Where the realized pattern was different from the intent, he referred to the strategy as emergent;
  • Strategy as position – locating brands, products, or companies within the market, based on the conceptual framework of consumers or other stakeholders; a strategy determined primarily by factors outside the firm;
  • Strategy as ploy – a specific maneuver intended to outwit a competitor; and
  • Strategy as perspective – executing strategy based on a "theory of the business" or natural extension of the mindset or ideological perspective of the organization.

In 1998, Mintzberg developed these five types of management strategy into 10 “schools of thought” and grouped them into three categories. The first group is normative. It consists of the schools of informal design and conception, the formal planning, and analytical positioning. The second group, consisting of six schools, is more concerned with how strategic management is actually done, rather than prescribing optimal plans or positions. The six schools are entrepreneurial, visionary, cognitive, learning/adaptive/emergent, negotiation, corporate culture and business environment. The third and final group consists of one school, the configuration or transformation school, a hybrid of the other schools organized into stages, organizational life cycles, or “episodes”.[18]

Michael Porter defined strategy in 1980 as the "...broad formula for how a business is going to compete, what its goals should be, and what policies will be needed to carry out those goals" and the "...combination of the ends (goals) for which the firm is striving and the means (policies) by which it is seeking to get there." He continued that: "The essence of formulating competitive strategy is relating a company to its environment."[19]

Some complexity theorists define strategy as the unfolding of the internal and external aspects of the organization that results in actions in a socio-economic context.[20][21][22]